Supreme Court finds class arbitrations counter intent of the FAA

On the face of it, the Supreme Court’s April 27 decision in AT&T Mobility v. Concepcion was about the validity of commercial arbitration agreements with clauses that preclude class action claims by consumers—specifically a clause in a cell phone contract. But employment defense attorneys immediately seized on the ruling as a possible antidote to the rash of class actions plaguing employers.

In a 5-4 decision, the nation’s highest court found that the Federal Arbitration Act (FAA) pre-empted a California Supreme Court ruling in Discover Bank v. Superior Court, on which plaintiffs Liza and Vincent Concepcion based their claim. The Concepcions wanted to litigate a dispute they had with AT&T Mobility over a $30.22 charge, even though they had signed an arbitration agreement with a class action waiver. The 2005 Discover Bank decision banned class action waivers in arbitration agreements involving cases with such small claims that they would not be practical to individually litigate. The California high court said such class waivers would insulate a wrongdoer from responsibility and therefore should not be enforced.

The 9th Circuit agreed that this ruling applied to the Concepcions’ case, finding the amount that AT&T would have to pay was too small to cause the average consumer to pursue an individual claim. But when the case reached the Supreme Court, the majority found the agreement enforceable, noting that a principal purpose of the FAA is the enforcement of arbitration agreements according to their terms in order to facilitate streamlined proceedings.

While arbitration of individual claims can reduce costs and accelerate dispute resolution, arbitration of class claims does not have the same benefits, the court found.

In a decision written by Justice Antonin Scalia, the Supreme Court held that state laws that preclude enforcement of an arbitration agreement’s terms, whether made by legislatures or courts, are pre-empted by the FAA. “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons,” Scalia wrote.

Employment experts agree class action waivers in employment arbitration agreements will almost certainly be upheld by the courts in light of AT&T Mobility, though they caution that such agreements will not be a panacea.

“This is an incentive for employers who are concerned about class actions to consider having arbitration agreements,” says Henry Lederman, a shareholder at Littler Mendelson. “Even before this case came out, many employers liked arbitration, but some didn’t. With this new case, it may be that those who did not like it before will reconsider.”

Easier to Enforce

One problem some employers encounter with arbitration, Lederman adds, is likely resolved by AT&T Mobility—collateral litigation over the arbitration agreement itself.

“Some employers say, ‘Arbitration is supposed to be faster and easier, but we end up in lengthy appeals over the arbitration agreement without even talking about the merits of the case,’” he says. “One would hope the U.S. Supreme Court decision will make it easier to enforce agreements. It’s a very important case.”

Some employers who have employment arbitration agreements did not include class action waivers because of uncertainties about how the courts would view them. They may want to revise these agreements in light of AT&T Mobility.

“For employers, clearly now that the Supreme Court has spoken on the topic, and even though it was a close call, adding to mandatory arbitration clauses a waiver of class arbitration is a smart thing to do,” says Alan Lesnewich, a partner at Fisher & Phillips. “Any employer should think about this if they haven’t done so already because before it was up in the air as to how the court would approach this.”

FLSA Exception

That’s not to say that there aren’t several key points still up in the air. For example, the Fair Labor Standards Act (FLSA), the basis for federal wage and hour claims, specifically grants the right to collective actions. That puts a damper on hopes that AT&T Mobility would curb the tidal wave of FLSA collective actions swamping employers around the country.

“Employees have a statutory right under the FLSA to bring a collective action for wage and hour matters that shouldn’t be affected by this decision,” says Mark Batten, a partner at Proskauer Rose.

When a case challenging a class action waiver provision in the context of a FLSA claim reaches the Supreme Court, it would put two federal laws in conflict, unlike AT&T Mobility, which pitted a federal law against a state law it pre-empted.

“I’ll bet that gets tested fairly quickly,” Lesnewich says. “You would have the FLSA competing with the Federal Arbitration Act. The dynamics of interpreting two federal statutes with competing interests might get a different result.”

Waiver Wording

Batten raises another caveat—the possibility that the National Labor Relations Board (NLRB) may challenge arbitration agreements with class action waivers as violating workers’ rights under Section 7 of the National Labor Relations Act. That section guarantees the right of employees to engage in activities for their mutual aid and protection, and it applies to both union and non-union workforces. In some previous cases, the board has found workers who filed class actions were exercising their Section 7 rights.

t’s an open question at this point how [the AT&T Mobility decision] is going to fit in with these Section 7 rights,” Batten says. “We perceive that there is a clash between the Supreme Court giving employers very broad authority to knock out class actions in arbitration [and what the NLRB may view as Section 7 rights]. What’s the board going to think about that, and where is the board going to take this? It’s difficult to predict.”

As a result, Batten recommends carefully wording class action waivers to include an acknowledgment of employees’ Section 7 rights, including such activities as discussing the case with other employees and investigating to see if others have similar complaints. He says the board is very sensitive to words that could have a “chilling effect” on employees’ willingness to pursue those rights.

“Be careful of the possibility that employees might misunderstand the breadth of what they are signing,” he says.

He also notes that the board is likely to find that disciplining or firing an employee who tries to bring a class claim precluded by a waiver in an arbitration agreement is a violation of Section 7.

“Even if the waiver is valid and enforced, the employer likely can’t separately punish the employee for trying to get around it without running afoul of Section 7,” he says.